Horizon Oil Seeks Partner for PNG Gas Assets

By David Winning

International energy companies seeking a foothold in Papua New Guinea’s nascent natural gas export industry are being courted with a new opportunity.

Sydney-based Horizon Oil is seeking to sell up to half of its assets in Papua New Guinea, after drilling results in the forelands region of the Southeast Asian country beat expectations and highlighted the potential for a new liquefied natural gas plant.

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A deal could be worth around 250 million Australian dollars (US$259 million) based on recent transactions in Papua New Guinea, which U.K.-based consultancy Wood Mackenzie estimates has reserves totaling at least 26 trillion cubic feet of natural gas.

Papua New Guinea’s appeal as a gas exporter is growing in step with Asia’s demand for natural gas, particularly in China which is striving to reduce its reliance on burning dirty coal for power. The International Energy Agency this month forecast that China’s consumption of natural gas is poised to quadruple from 130 billion cubic meters in 2011 to 545 billion cubic meters in 2035.

Unlike rival LNG suppliers in the Middle East, shipments to Asia from Papua New Guinea won’t pass through the Malacca Strait choke point near Singapore and freight charges are lower.

“We believe Horizon Oil has a commanding and material position in the liquids-rich sweet spot of the Papuan foreland basin and we have had strong interest in the sale from substantive LNG industry players,” Horizon Oil Chairman Fraser Ainsworth told shareholders at the company’s annual meeting in Sydney.

A successful sale would balance Horizon’s oil and natural gas portfolio, which also includes producing and development assets in New Zealand and China, with financing for advancing its Papua New Guinea project, he said. It would also enable the company to firm up plans to pay dividends in future.

A person familiar with the matter said Horizon Oil had hired investment bank Lazard to lead the partial selldown of its Papua New Guinea assets. The company also owns a producing oil field in New Zealand, and is developing an oil project in southern China’s Beibu Gulf in partnership with Roc Oil and China’s Cnooc Ltd. that is due to start production early next year.

Horizon’s sale process comes just weeks after France’s Total made its first foray into Papua New Guinea through an exploration deal with Oil Search in the Gulf of Papua. Separately, Texas-based InterOil said Nov. 16 it expects to agree the sale of part of its interest in two fields and its Gulf LNG project in the country within weeks.

However, Papua New Guinea isn’t immune from headwinds such as currency swings buffeting its bigger neighbor Australia, where US$180 billion of investment is currently being plowed into gas-export projects and several more developments are on the drawing board.

Earlier this month ExxonMobil said the cost of its PNG LNG project in Papua New Guinea had blown out to US$19 billion, in part due to exchange-rate movements. It also blamed local landowner disputes and torrential rain for the overrun from its earlier budget of US$15.7 billion.

Analysts and investors seeking to put a value on Horizon’s assets will likely look to the acquisition by Japan’s Mitsubishi in February of stakes in several natural gas discoveries and prospects in Papua New Guinea from Canada’s Talisman Energy for US$280 million.

Talisman is a joint venture partner of Horizon Oil in the PRL 4 and PRL 21 tenements, which respectively contain the Stanley and Elevala/Ketu discoveries. Sydney-based Horizon owns 50% of PRL 4 and 45% of PRL 21, as well smaller stakes in two adjacent blocks.

However, the price tag for half of Horizon’s equity will have been boosted by the successful Ketu-2 well in PRL 21, recent reserves upgrades, and this year’s final investment decision taken on developing the Stanley field.

The Ketu field contains a mean contingent resource of 432 billion cubic feet of natural gas and 19.3 million barrels of condensate, Horizon said in a regulatory filing last month.

That adds to the estimated 434 billion cubic feet of gas and 24.6 million barrels of condensate at the Elevala field, with the joint venture now preparing to drill another prospect – Tingu – in the first half of next year.

Energy companies typically look for 1 trillion cubic feet of natural gas reserves for each million ton of annual LNG capacity they plan to build. When added to gas reserves discovered at Stanley, this suggests Horizon has already found enough gas to support a 1-million-ton-a-year LNG plant, while further drilling could see this capacity at least double in size.

“The increased gas volume–around 1.2 trillion cubic feet in PRLs 4 and 21 combined–is approaching the scale required for a mid-scale LNG project and we are advanced in our pre-feasibility studies of this opportunity,” the company said in a statement to the Australian Securities Exchange on Oct. 12.

In July, Horizon said any LNG scheme could happen alongside current plans to recover condensate from the gas for early export via the Fly River.

Companies in China, Japan and South Korea that rely on LNG to plug a gap in their energy mix have been actively seeking equity in LNG projects as well as traditional offtake deals.

Citing a person familiar with the situation, Dow Jones Newswires reported Feb. 7 that Korea Gas is in talks to form a consortium with Mitsui and Japan Petroleum Exploration to join InterOil’s project in Papua New Guinea.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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